Air Conditioning: a Luxury or a Necessity?

Should air-conditioning be treated as a taxable luxury good in a country where summer temperatures routinely go over 40 degrees Celsius?

Aanchal Vij, a 20-year-old student from Delhi University, often stops at QD’s, a fast-food restaurant, for a bite to eat.

QD’s has a seating area and air conditioning – a big selling point during Delhi’s steamy summer months.

But Ms. Vij says that while today she can afford to go to QD’s, she may stop going there if prices go up significantly following a government proposal to impose higher taxes on restaurants that have ACs.

On Thursday, in his budget speech, Finance Minister P. Chidambaram proposed to extend the service tax to all restaurants that have air conditioning.

Currently, the service tax only applies to air-conditioned restaurants that also have a liquor license. The logic behind this is that venues that have both tend to draw wealthier customers.

Calling this distinction “artificial”, Finance Minister P. Chidambaram proposed to levy the service tax on “all air conditioned restaurants.”

But should air-conditioning be treated as a taxable luxury good, even in a country where summer temperatures routinely go over 40 degrees Celsius (104 degrees Fahrenheit)?

“An air-conditioner is not something a restaurant installs to get more customers or customers of a certain kind. It’s a necessity,” says Ms. Vij. For students like her, a few extra rupees on the bill make a difference. If prices go up significantly, she says she may consider going to take-away eateries instead of sitting in QD’s.

Akhil Malik, owns QD’s two branches, which are located in campus areas of Delhi University. “The service tax would mean double taxation and it’s going to be difficult to cope with this,” said Mr. Malik, who started paying value added tax last year. This led to an increase in prices in his restaurants.

Mr. Malik said he isn’t considering the possibility of getting rid of the air-conditioners: “That is practically impossible in a country like India where summers are miserable.”

The latest move didn’t go down well in the industry. “It is unfortunate that an air-conditioner is still considered a luxury in our country,” says Garish Oberoi, vice president of the Federation of Hotel & Restaurant Associations of India, an industry body.

The tax is likely to mean higher prices for customers. K. Ramakrishnan, the head of marketing at Café Coffee Day, said, “We are either going to pass the price to the customer or absorb it internally which will impact the company’s profit margin.”

Currently, a customer is liable to pay a 12.36% service tax on 40% of the total amount charged. Take the chilly chicken and vegetarian noodles dish from QD’s, for instance. Now, that dish is priced at 150 rupees ($2.75) but with the service tax, the cost could go up to around 180 rupees ($3.30).